Excise tax is a tax on a specific product or activity, not on income or property

An excise tax is a tax added to the price of certain goods or services. Unlike income tax (which taxes what you earn) or property tax (which taxes what you own), excise tax targets particular items the government wants to discourage or regulate. The tax gets built into the price you pay at the register or pump.

The federal government and most states use excise taxes on things like gasoline, cigarettes, alcohol, and airline tickets. Some cities add their own excise taxes on specific products. When you buy a pack of cigarettes for $8, part of that price is excise tax. When you fill your gas tank, a portion of what you pay per gallon is excise tax.

The money from excise taxes goes into government budgets — sometimes into general funds, sometimes into specific accounts. Federal gas tax, for example, goes into the Highway Trust Fund, which pays for road maintenance and construction.

Key Takeaways

  • Excise tax is added to the price of specific products like gasoline, cigarettes, alcohol, and airline tickets, not applied to your income or property.
  • Federal excise tax rates vary by product: gasoline is taxed at 18.4 cents per gallon, while cigarettes face a federal tax of $1.01 per pack.
  • States and cities often add their own excise taxes on top of federal rates, so the total tax on a product depends on where you live.
  • Excise taxes are designed both to raise revenue for government and to discourage consumption of products considered harmful or to fund related services.

How excise tax differs from sales tax and income tax

Sales tax and excise tax are both added to what you pay, but they work differently. Sales tax applies to most goods and services you buy — groceries, clothing, restaurant meals — at a flat rate set by your state or city. Excise tax applies only to specific items and is usually much higher per unit. A 7 percent sales tax on a $100 item costs you $7. But a $1.01 federal excise tax on a single pack of cigarettes is a fixed amount, regardless of the pack's price.

Income tax is taken from your paycheck or owed when you file taxes each year. It is based on how much money you earned. Excise tax has nothing to do with your income — it is a cost added to the product itself, whether you earn $20,000 a year or $200,000.

You pay excise tax whether you want to or not, because it is built into the price. You cannot avoid it by shopping around or waiting for a sale. The tax is the same whether you buy one item or one hundred.

Common products and services that have excise tax

Federal excise taxes apply to a fairly short list of items. Gasoline and diesel fuel are taxed at 18.4 cents and 24.4 cents per gallon respectively. Cigarettes face a federal tax of $1.01 per pack. Smokeless tobacco and cigars are taxed by weight or count. Alcohol — beer, wine, and spirits — each have different tax rates per unit.

Airlines, rental cars, and certain sporting goods also carry federal excise taxes. Fishing equipment, firearms and ammunition, and indoor tanning services are taxed. Telephone services and certain medical devices have excise taxes as well.

States and cities add their own excise taxes on top of federal rates. Many states tax gasoline higher than the federal rate. Some cities have excise taxes on sugary drinks, cannabis products, or hotel rooms. A few states tax vaping products. The total excise tax you pay depends on where you live and what you buy.

Why the government uses excise tax

Governments use excise taxes for two main reasons: to raise money and to discourage certain behaviors. Taxes on cigarettes and alcohol are partly meant to reduce consumption of products linked to health problems. Taxes on gasoline fund road maintenance and construction. The higher the tax, the more expensive the product becomes, which can change buying habits.

Excise taxes also target activities or products that create costs for society. Gasoline taxes help pay for the roads that vehicles damage. Cigarette taxes help fund smoking-cessation programs and healthcare costs related to smoking. This logic is called the "polluter pays" principle — those who use or consume the product bear some of the cost it creates.

From a revenue standpoint, excise taxes are predictable. The government knows roughly how much gasoline people will buy each year, so it can estimate tax revenue. This makes excise taxes useful for funding specific programs or infrastructure that require steady, long-term money.

How excise tax rates are set and change

Congress sets federal excise tax rates through legislation. These rates do not change automatically with inflation — they stay the same until Congress votes to raise or lower them. The federal gas tax has been 18.4 cents per gallon since 1993, which means its real value has declined as inflation has occurred.

States set their own excise tax rates independently. Some states tax gasoline at 20 cents per gallon or higher. Others tax cigarettes at rates well above the federal $1.01. States can raise or lower their rates whenever their legislatures vote to do so, which happens more frequently than federal changes.

Local governments — cities and counties — can add excise taxes on top of state and federal rates. A bottle of beer might carry federal excise tax, state excise tax, and city excise tax all stacked together. The total you pay at checkout reflects all three layers.

Who actually pays excise tax

You pay excise tax whenever you buy a taxed product. The tax is included in the price, so you may not see it listed separately on your receipt. Businesses that sell these products collect the tax and send it to the government, but the cost comes from your pocket.

Excise taxes are regressive, meaning they take up a larger share of income for lower-earning households than for higher-earning ones. A person earning $25,000 a year who buys a pack of cigarettes pays the same $1.01 federal tax as someone earning $250,000. That $1.01 represents a much larger percentage of the lower-income person's budget.

Some people pay more excise tax than others simply based on their consumption habits. Someone who drives 50 miles a day pays far more gas tax than someone who drives 5 miles a day. A person who smokes pays cigarette excise tax; a non-smoker pays none.

Frequently Asked Questions

Is excise tax the same everywhere in the United States?

No. Federal excise tax rates are the same nationwide, but states and cities add their own taxes on top. Gasoline, cigarettes, and alcohol cost different amounts in different places because of these additional state and local excise taxes. You can check your state's tax rates on the state revenue or taxation department website.

Why do some products have excise tax and others don't?

Congress chooses which products to tax based on policy goals. Products taxed are typically those the government wants to discourage (cigarettes, alcohol) or those that create public costs (gasoline for road maintenance). Most everyday items like food, clothing, and household goods do not carry federal excise tax, though they may be subject to regular sales tax.

Can I get a refund or exemption from excise tax?

Individuals cannot get refunds on excise tax they have paid. Some businesses may be exempt from certain excise taxes if they use products for specific purposes — for example, farmers may not pay fuel excise tax on diesel used for farming. These exemptions are rare and require documentation. Contact your state's tax agency to learn if any exemptions apply to your situation.

Does excise tax go into a general fund or a specific program?

It depends on the tax. Federal gas tax goes into the Highway Trust Fund for road projects. Federal cigarette tax goes into general revenue and some healthcare programs. State and local excise taxes may fund specific programs or go into general budgets. Your state's tax agency website lists where specific excise taxes are directed.